Jo-Ann looks to 2006

With excess inventory and key management positions
vacant, the Hudson-based fabric and crafts retailer is making
changes to curtail its financial losses

Things probably will get worse before they get better for fabric and crafts retailer Jo-Ann Stores Inc. (NYSE: JAS).
Jo-Ann Chairman and CEOAlan Rosskamm said in a conference call with securities analysts that first-half results for next year would be difficult. However, Mr. Rosskamm said company executives believe that by restructuring Jo-Anns management team, getting rid of excess inventory and more heavily emphasizing its crafts business, Jo-Ann could deliver earnings growth again by the second half of 2006.
Jo-Ann lost $4.1 million in its fiscal third quarter ended Oct. 29, due in large part to a 2.2 percentage point decline in gross margins compared with the same period last year. So far this year, Jo-Ann has reported a loss of $5 million, compared with profits of $14 million in the first nine months of last year.
Jo-Ann officials expect gross margins in the fourth quarter to decline even further  by between 3 and 5 percentage points  compared with margins in last years fourth quarter. The company is slashing prices in an attempt to jettison excess inventory.
It is unlikely that we will be in a position to deliver earnings improvement until at least the second half of next year, Mr. Rosskamm said in the companys earnings statement.
Although he blamed declining customer demand as part of Jo-Anns problems, Mr. Rosskamm acknowledged in the earnings statement that decisions we made compounded the problem.
Laura Richardson, an analyst with BB&T Capital Markets in Virginia, said the company placed too much of an emphasis on seasonal holiday products such as Halloween costumes and Christmas ornaments.
Its hard for a retailer to differentiate itself in those categories from the hundreds of other retailers that specialize in those categories, she said.
However, because most companies buy seasonal products about a year in advance, it may be hard for Jo-Ann to produce a quick change on that front, Ms. Richardson said.
The merchandise has been bought, she said. The plans have been made. Its too late to change it.
The company showed $654 million in inventory on its balance sheet at the end of October. That number was about $100 million higher than normal levels, said Don Tomoff, Jo-Anns director of investor relations. Company officials are determined to slash inventory, which will cause margins to fall further.
Well do whatever we need to do, Mr. Tomoff said.
Long term, company officials plan to continue opening more superstores, which are larger and have more crafts-related products than traditional Jo-Ann stores. However, the company is pulling back from original growth plans.
Company officials now expect to open 25 to 30 stores in 2006, down from earlier projections of 60, Mr. Tomoff said.
Adding to Jo-Anns challenges, the company has numerous upper-level management positions to fill  chief executive, chief financial officer, director of human resources and general counsel. Earlier this week, Jo-Ann announced plans to separate its chief executive and chairman positions, both of which currently are held by Mr. Rosskamm.
Ms. Richardson of BB&T said the latter move is significant.
Anytime you change a CEO, thats major, she said. But, she added, Its a positive sign that theyre looking inside to see how theyve contributed to the problems this year with their own actions.
Mr. Tomoff acknowledged that the open management positions are a concern.
Anybody looking at the company would think absolutely thats first thing that wed need to take care of, he said. You have to have stability at the top of your company.